Tories likely to balance books in 2014-15

OTTAWA - The governing Conservatives are singing the final aria of their five-year deficit-fighting opera, finally ready to draw the red-ink curtain on a new show: a 2015 election campaign built on managerial competence and bulging federal coffers.

First, though, comes a campaign of a different sort: an effort to tightly control spending in order to build a war chest to finance past election promises and convince voters to deliver a fourth mandate.

Finance Minister Jim Flaherty is projecting a $2.9-billion deficit in 2014-15, but the red ink will likely evaporate to balance or even a surplus by the end of the fiscal year if there's no need to dip into his $3-billion rainy-day fund.

"Yes, you're right, if you do the arithmetic, you could have had a budget that is balanced by $100,000...which is really not significant," Flaherty told a news conference before introducing the plan in the House of Commons.

"I prefer to have a nice, clean surplus next year."

Indeed, the 2015-16 balance is expected to come in at $6.4 billion — well beyond the $3.7 billion Flaherty projected in last November's economic update.

The extra cash could help the Tories pay for previous campaign promises, such as income-splitting for families with children under 18, which some estimate will cost about $3 billion a year, and expanding room in tax-free savings accounts. And the surpluses will keep growing, reaching $10.3 billion in 2018-19.

The savings will also allow the Conservatives to accelerate their plan to bring down federal debt as a percentage of GDP. Prime Minister Stephen Harper has promised to bring the debt-to-GDP ratio down to 25 per cent by 2021, but the numbers suggest the Tories could reach that target in six years.

Canada's federal debt is projected to stand at $618.9 billion for 2014, just 32 per cent of GDP, but is expected to slim down to 25.5 per cent in 2018-19.

Tuesday's budget was the last act of the Tories' long drawn-out deficit fight, said TD chief economist Craig Alexander.

"When the government gets into surplus, which will be in 2015, then you can have a different discussion," Alexander said.

"Because now you're going to be talking about surpluses and how to use that money and what are going to be the new initiatives and the new spending measures."

But the opposition parties say the Tories are putting their political interests ahead of Canada's economic well-being.

Flaherty's self-styled "boring" budget could have done to spur job creation, particularly among unemployed young people, said the New Democrats. Instead he's undermining the country' economic performance with his austerity measures and keeping the unemployment rate unnecessarily high.

"This year's budget is about next year's budget. That couldn't be clearer," said NDP Leader Tom Mulcair.

"They're trying to set it up in such a way that they'll be able to announce a balanced budget, irrespective of whether or not the numbers actually work. It doesn't matter. This is all about lining themselves up for the 2015 election."

The Liberals, meanwhile, accused the Tories of balancing the budget on the backs of workers with artificially high employment insurance premiums, one-time asset sales and delaying the purchase of much-needed military equipment.

"This budget does not have a plan for growth," said Liberal Leader Justin Trudeau. "It's a plan to get the Conservatives re-elected and it's the height of cynicism."

This year's budget includes just $700 million in net new spending, which will be more than offset by other measures to save or bring in more cash.

They'll rake in $700 million a year by raising tobacco taxes. They're also planning to save $1.5 billion next year — and $7.4 billion over five years — by cutting compensation for public servants. They're also delaying plans to buy new military equipment, allowing for savings of $2.2 billion between now and 2016. Tax changes, including cracking down on tax cheats, are expected to bring in $400 million a year starting 2015-16.

Direct program spending will be slashed by $5.7 billion to $113 billion in 2014-15, then climb slowly over the next three fiscal years.

However, departments are still projected to spend less money than they're allocated.

Lapsed funding — departmental money that went unspent — is estimated at $7 billion this past fiscal year, and is expected to hit $6.2 billion in 2014-15 and $5.8 billion in 2015-16. Departments can carry forward part of that money, but the rest goes to the bottom line.

"To me, this entire budget is nothing but, 'We're going to balance the books by at least 2015 — stay tuned,'" said Alexander.

"And then 12 months from now, we're going to be having a discussion about, 'OK, now that the government has balanced the books ... now how are you going to start spending that surplus. And I think that's going to be, in a sense, a more interesting conversation."

For now, the budget's projections are sound, said BMO chief economist Doug Porter, although the government is counting on the U.S. economy picking up in the year ahead to help lift Canada's economy.

Continued restraint and some of the new measures in the budget will actually weigh on growth a little bit, Porter said. But other measures, such as money for the auto industry and the Detroit-Windsor bridge, will offset that.

"The net new measures in this budget are worth about one-tenth of one per cent of GDP in terms of net new restraint," Porter said.

"Not a big deal, but at the margin it does actually chip away a little bit at growth over the near term."

Note to readers: This is a corrected story. A previous version said the Conservatives could reach their debt-to-GDP target six years ahead of schedule. In fact, the estimate is to hit the target in six years.